With stocks of many companies trading well below the conversion price, the authorities are revisiting the rules in an environment where more foreign capital outflow could further pull down the rupee and a spate of defaults could lead to derating of Indian companies in overseas markets.

If the proposal now being considered is finally approved, Indian companies will be allowed to renegotiate the terms of repayment of these bonds, including resetting the price at which these instruments can be converted into shares at a future date, said a person with knowledge of the matter.

A convertible bond is a quasi-debt instrument that offers investors a fixed coupon or interest rate over a five-year maturity of the bonds with an option to convert them into shares at a pre-determined price, often at a premium to the market price of the issuer.

In a bull market, several companies had issued FCCBs at a steep premium, hoping that stocks would continue to surge. Today, with share prices quoting at a fraction of what they were, these issuers are struggling to redeem the bonds.

The RBI has so far allowed companies to restructure their FCCBs and refinance them by raising fresh foreign loans or new bonds and also to buy back outstanding bonds at a discount to the face value. A limited window to facilitate this was open till March this year.

But this time, with many issuers staring at defaults and seeking permission to reset the conversion price, talks are underway between the government and RBI and Sebi to allow greater flexibility to Indian companies, said the person. The FCCB rules are administered by the government.

Said a foreign banker: "It will be a great relief for Indian corporates in terms of addressing the forex issue. The question is whether the promoters will be agreeable to a lower conversion price if they believe there is an intrinsic value in their share price over and above what it is today."

FACING AN UPHILL TASK

They may not reset the conversion price but go for an alternative finance," the banker added.

In 2012 alone, FCCBs aggregating Rs 35,000 crore (close to $7 billion) could come up for repayment. Many issuers have approached the central bank and government seeking flexibility in repayment as they struggle to organise funds to redeem these bonds.

Faced with a slowdown in the domestic market and weak prospects overseas, for many it's an uphill task.

Difficulty in raising money, particularly by mid-tier companies, from overseas markets is compounding the problem. Most firms never built a corpus to redeem these securities as they were under the impression that the bonds would be converted into shares in due course.

Credit rating agencies like Fitch and Crisil have flagged off the growing concern relating to potential defaults on FCCBs in 2012. Fitch, in a report earlier this year, said of the 59 companies facing redemption of close to $7 billion in 2012, about 17% would restructure the bonds while 20% could default.

Of a group of 19 corporates, at least eight have already defaulted on other debt obligations, it said. Pharma company Wockhardt was one such firm whose bondholders took the company to court.

This year, Suzlon Energy faces a redemption of close to Rs 2,000 crore (or $389 million), with the first tranche in May. Some of the others are Strides Arcolab (Rs 400 crore, or $80 million), JSW Steel (Rs 1,370 crore, or $274 million), Rolta India (Rs 485 crore, or $97 million) and Jaiprakash Associates (Rs 1,800 crore, or $354 million).

The issue was discussed at the last meeting of a committee of the Financial Stability and Development Council, or FSDC, headed by RBI Governor D Subbarao. While the finance ministry and central bank appear to be on common ground on this issue, Sebi is opposed to the move.

The capital market regulator is of the view that allowing an FCCB issuer and its investors to set fresh terms, including the freedom to convert the bonds into shares at a lower conversion price than what was originally envisaged, is against the interests of other shareholders. Sebi's concern also stems from the fact that a probe last year revealed some of the promoters of Indian companies had indulged in stock manipulations before floating FCCBs.

A senior official said Sebi, however, has indicated it would agree to the proposal if it was in the broader macro interest and provided this was a facility that would be offered for a limited period. But the central bank may not be comfortable with setting the pricing terms for conversion of the bonds into equity.